U.S. government bonds strengthened Wednesday after the Federal Reserve's interest rate statement.
In recent trading, the yield on the benchmark 10-year Treasury note was 2.00%, according to Tradeweb, compared with 2.04% shortly before the Federal Reserve decided to keep interest rates intact. The rate was 1.996% on Tuesday.
Bond yields rise as their prices fall.
The 10-year's yield, a foundation of global finance, remains near its lowest level since late October. It has fallen from 2.273%, where it had settled at the end of 2015.
The moderate price weakness suggests investors took some chips off the table as the bond market has posted strong gains since the start of the year amid a big drop in global stocks and oil prices.
Investors expect the Fed to stand pat after raising short-term interest rates in December for the first time since 2006. The Fed is likely to acknowledge the risk of market volatility and lower inflation expectations, economists and analysts say.
"The Fed will fine-tune things today without upsetting markets, but that is very tricky and very difficult job to do," said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York.
Any signal from the Fed that downside risk to the U.S. growth outlook has increased would bolster speculation the Fed would be more hesitant to raise rates this year. This scenario would drive investors to buy Treasury bonds, sending yields lower.
Money managers say the Fed would be better off by refraining from making big changes to their assessment of the growth outlook or flagging the dollar in their interest-rate statement. Some warn that making a big change to the growth outlook would be seen as the Fed having made a mistake when it raised rates in December, which could drive investors to sell stocks and buy Treasury bonds.
"The Fed needs to be calm," said Stephen Jen, managing partner at London-based hedge fund SLJ Macro Partners LLP. "If the Fed statement shows it starts panicking, investors may become more scared. That is a result the Fed doesn't want to see."
Bond yields are vulnerable to rising if the Fed signals that it will continue to monitor economic data and leave the door open to a rate increase in March, traders say.
Fed officials projected four rate increases during 2016 in their December meeting. But interest rate futures, where hedge funds and money managers bet on the Fed's rate policy outlook, only priced in one rate increase before the end of this year.
Some traders say betting on only one rate increase is complacent. While inflation expectations have dropped due to lower oil prices and a stronger dollar, recent data in the U.S. haven't showed that the growth outlook has deteriorated. A report on Tuesday showed U.S. consumer confidence has strengthened.
Fed officials still have time before its March policy meeting if they want to alter its growth expectations, some traders say.
Pricing the Fed being largely on hold this year "seems to be a stretch," said Anthony Cronin, a Treasury bond trader at Société Générale SA. "The relative calm in equities of late increases the chances that international turmoil may not spill over to adversely impact the U.S. economy."
Fed funds futures, used by investors and traders to place bets on central-bank policy, showed Wednesday that they see a 34% likelihood of a rate increase from the Fed at its March 2016 policy meeting, according to data from CME Group.
The probability was 52% a month ago.
U.S. mutual bond funds and exchange-traded funds targeting Treasury debt attracted $2.47 billion new cash for the week ending Jan 20, the biggest one-week inflow since April 2015, according to data from Lipper.
But there are still investors betting on bond yields to rise this year, even as the bond market has moved against their wagers this month.
Hedge funds and money managers have accumulated $56.2 billion of net short bets on Treasury bond futures for the week that ended Jan 19, according to data from Cheng Chen, interest-rate strategist at TD Securities.
That was the largest net short since at least August 2008, said Mr. Chen. A short bet wagers on bond prices to fall.
By Min Zeng